Steel demand headed for a slump; prices, margins to fall

Domestic steel demand is likely to see a sharp dive in the first quarter of the coming fiscal due to stalled factories and production cutbacks across major user industries like auto and construction, Icra said.

Domestic steel demand is likely to see a sharp dive in the first quarter of the coming fiscal due to stalled factories and production cutbacks across major user industries like auto and construction, Icra said on Friday. The rating agency has also lowered its forecast for steel demand growth for 2020-21 as the country has imposed a nationwide lockdown to contain the spread of the Covid-19 pandemic. “We estimate steel demand to grow by 2-3% in FY21,” Icra's senior vice president Jayanta Roy said. Against this, domestic steel consumption grew by 3.8% in FY20.

With poor demand likely to pull down steel prices and factories running at lower capacities, steelmakers’ profitability is also expected to come under pressure. “Steel industry growth is closely linked to that of a country's GDP,” the agency said. “With GDP growth rate being revised downward by nearly 4.5% in Q1FY21, domestic steel consumption growth is also expected to come down.” Icra’s parent Moody’s Investors Service on Friday more than halved the country’s 2020 growth forecast to 2.5% from 5.3% earlier. Icra expects benchmark hot rolled coil (HRC) steel prices, which had increased to Rs 38,000 per tonne in the past five months, to fall to Rs 36,500 next month. Meanwhile, steelmakers have scaled down output and are maintaining plant and equipment on standby mode with minimal workforce amidst the lockdown.

According to a report released by Edelweiss Securities on Friday, Steel Authority of India (SAIL) has scaled down blast furnace operations at the Bhilai steel plant, ArcelorMittal-Nippon Steel India has cut operations by 50%, and Vizag Steel Plant run by RINL has cut back production by 40%. JSW Steel has announced it is scaling down or suspending operations in the wake of the lockdown while Tata Steel is also considering aligning its production in line with manpower availability, the report said. With the lockdown in place through April 15 and uncertainty thereafter, analysts say steelmakers’ volumes and margins are likely to be at risk. “The lockdown has also stalled ongoing expansion projects," the Edelweiss report said. “In our view, this would particularly dent consensus volume growth forecasts for JSW Steel and SAIL."

Icra has almost halved its forecast for the steel industry’s margins for FY21 to 16.5% from its previous estimate of 30. It pointed out that prices of coking coal, the main raw material for the sector, are inching up and said companies will be running at a lower capacity of 79-80% against a capacity utilisation rate of 81% in FY20. A report by Emkay Global said, “We expect Q1FY21 to be a record-low quarter in terms of both top-line Ebitda and profit on the back of exceptionally weak demand.” While India had emerged as a net exporter of steel in FY20, given the risk of delayed deliveries and stringent customs restriction all over the globe, exports and imports are likely to come down next fiscal even as major importing nations Italy and Belgium are highly impacted by Covid-19 outbreak, Icra said.